Once again the FED expressed its view that it will continue “purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.” In the same time “the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent,…”.
Simply put the FED is telling us that will keep intervening directly in the fixed income market and will keep flooding the system with more money. Myself and less and less economists are worried that this is one of the worst disasters for market economics in the making. To be clear I do support loose monetary policy after a negative shock to production, but keeping it this loose for this long is dangerous. What is also dangerous is to have the arrogance to believe that you will be able to control the situation in the after running this type of monetary policy for so long.
Pro-government (intervention) economists will point to low inflation and tell me that all my worries are unfounded. Yes, CPI or PCE inflation has not exploded. BUT this is not why the FED is keeping monetary policy loose. The sole purpose of the FED’s QE program is economic growth. How has the economy responded after being drowned in cash? Well it has not.
The next shows the FED’s estimates for economic growth, years 2012 and 2013. I look at every FOMC meeting that publishes the forecasts for 2012 and 2013. As you can see, more and more money did not make the FED increase its short term or long term forecasts. Although the FED injected more liquidity new information made it adjust its forecasts lower. Simply put, even the FED has a hard time showing accelerating growth although it intervenes more and more. At this point even the latest FED estimate for 2012 looks too optimistic. But more troubling for everyone should be the estimate for 2013 which is falling again.
The biggest risk is now that the FED is so focused on delivering growth via loose money supply that is missing some other big imbalances(bubbles) building up in the economy.